RIO DE JANEIRO--Fitch Ratings has affirmed the Long-Term Foreign and Local Currency (LT FC/LC) Issuer Default Ratings (IDRs) for Empresas CMPC S.A. (CMPC) at 'BBB+'. The Rating Outlook is revised to Negative from Stable. Fitch has also affirmed the LT FC IDR for Inversiones CMPC at 'BBB+' and revised its Rating Outlook to Negative from Stable. A full list of rating actions follows at the end of this release.
The revision of the Outlook to Negative reflects Fitch's base case projections that CMPC's net leverage will remain above 3.0x in 2016, which is materially higher than previously projected following more than 12 months of full operations of the Guaiba II pulp mill. Despite higher pulp sales volume, company results were negatively impacted by strengthening of the U.S. dollar, soft pulp prices and lower sales in the paper division. If net leverage falls to below 2.5x during 2017, the Negative Outlook would likely be revised.
Inversiones CMPC is a wholly-owned subsidiary of CMPC and is incorporated in the Cayman Islands as an exempted limited liability company. All of Inversiones CMPC's debt is unconditionally guaranteed by CMPC. Its ratings have been linked to those of CMPC through Fitch's Parent and Subsidiary Rating Linkage Criteria.
KEY RATING DRIVERS
Excellent Regional Tissue Business
CMPC's credit ratings reflect its strong business positions within Latin America. The company is the leading tissue producer in Chile, Peru, Argentina and Uruguay and has a growing presence in markets such as Brazil and Mexico. CMPC's strong market position in tissue, which accounted for 22% of its EBITDA during the first half of 2016 (1H16), is the result of the strong brand equity of its products, its low production cost structure, and strong distribution network. CMPC is also the largest producer of packaging paper, boxboard, corrugated boxes and multiwall bags in Chile. Its paper and paper products divisions accounted for an additional 13% of EBITDA.
Solid Pulp Position
CMPC has a strong position in market pulp, as it is the third-largest market pulp producer globally, with an annual production capacity of hardwood and softwood pulp of 4.1 million tons. CMPC's new pulp mill started operations in May 2015 and added 1.3 million tons of additional eucalyptus market pulp production capacity in Brazil. Pulp and forest division sales generated 65% of the company's 1H16 EBITDA. The company's cash production costs are amongst the lowest in the world for both hardwood and softwood pulp, ensuring its long-term competitiveness.
CMPC's net debt-to-EBITDA ratio for the latest 12 months (LTM) was 3.3x as of June 30, 2016, per Fitch's calculation, and is not consistent with our expectation of fast deleveraging post start-up of the Guaiba II pulp mill. Fitch's base case projects net leverage to remain higher at around 3.2x in 2016 and decrease to about 2.8x in 2017. These assumptions consider low-cycle price assumptions of net hardwood and softwood pulp prices between USD550 and USD625 per ton during the next three years. These ratios are inconsistent with CMPC's historical leverage levels.
Weak Operational Cash Flow
Fitch projects that CMPC will generate about USD1.1 billion of adjusted EBITDA in 2016. This figure remains relatively unchanged from 2015 despite a full year of pulp output from Guaiba II. CMPC generated USD712 million of FFO, and CFFO was USD646 million during the LTM ended June 2016. This compares with USD727 million and USD669 million, respectively, during 2015, and USD648 million and USD712 million during 2014. Due to the scaling back of investments, CMPC's FCF was positive USD92 million for the LTM ended June 2016.
Significant Forestry Investments
A key credit consideration that continues to support CMPC's investment-grade credit profile is its ownership of about 1 million hectares of land throughout Chile, Brazil, and Argentina, where the company developed about 658,100 hectares of forestry assets. The plantations are valued at USD3.5 billion. Importantly, the nearly ideal conditions for growing trees in the region make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber and transportation costs between forest and mills.
Fitch's key assumptions within the rating case for CMPC include:
--Pulp sales volume of 3.6 million tons.
--Hardwood prices between USD550 and USD600 per ton during 2016-2017.
--USD617 million CAPEX in 2016 and USD667 million from 2017.
--CFFO between USD750 million and USD800 million in 2016-2017.
Future developments that may individually or collectively lead to a negative rating action include:
--An expectation that net leverage will remain above 2.5x during 2017, considering pulp prices remain relatively unchanged;
--Any change in the company's strategy to reduce leverage and improve capital structure;
--Deterioration in macroeconomic conditions in the countries in which the company has strong tissue businesses.
A rating upgrade for CMPC is not likely in the near future.
LIQUIDITY AND DEBT STRUCTURE
CMPC has a strong liquidity. As of June 30, 2016, CMPC had USD645 million of cash and marketable securities and total debt was USD4.4 billion. The company has a manageable debt maturity profile with USD92 million of financial debt falling due in 2H16, USD286 million in 2017, USD648 million in 2018 and USD690 million in 2019. As of June 30, 2016, total debt is composed of senior notes (68% of total debt), loans from BNDES (14%) and working capital lines (14%). About 87% of the company's debt was denominated in USD.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Empresas CMPC S.A. (CMPC)
--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+';
--Long-term National scale ratings at 'AA(cl)';
--Short-term National scale ratings at 'N1+(cl)';
--National equity rating at 'Primera Clase Nivel 1(cl)'.
--Long-term Foreign Currency IDR at 'BBB+';
--Senior unsecured long-term notes at 'BBB+';
--Short-term National scale rating at 'N1+(cl)';
--Long-term National scale rating at 'AA(cl)';
--Senior unsecured long-term debt denominated in Chilean pesos at 'AA(cl)';
--Commercial paper denominated in Chilean pesos at 'AA(cl)' and 'N1+(cl)'.
The Outlook for the corporate ratings was revised to Negative from Stable.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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